Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life who manages assets worth about Rs 60,000 crore has special advise for long-term investors with respect to volatility which could be caused by US elections.
Historical data has shown that investments made in a well-diversified portfolio in challenging times can be quite rewarding for investors over the medium to long term, he said in an interview with Moneycontrol’s Kshitij Anand.
Q) What is your call on markets, which are on the verge of hitting fresh record highs, and earnings? Is the market rise sustainable?
A) Q1 FY21 corporate earnings in India were better than pessimistic expectations (due to the COVID lockdown), and this was largely helped by cost reductions by various companies. Q2 FY21 earnings so far have largely been coming in better than expected.
For FY21, we estimate Nifty EPS growth to be flattish at around 2 percent and for FY22 we estimate a strong recovery in Nifty EPS growth to around 30 percent.
The Nifty index is currently trading at 19-20x of one-year forward earnings (which is above pre-pandemic levels), but the forward PE valuation based on FY22 earnings is quite reasonable (factoring-in the healthy recovery in corporate earnings).
Markets seem to be focusing more on the latter. We have also seen a healthy recovery in various high-frequency economic indicators, which has been quite encouraging.
It’s difficult to time markets in the short term, and we may see some short-term market volatility. But, the long-term investment story for India still remains intact and looks favourable.
Q) Your message to investors for this Diwali and your outlook for the next SAMVAT?
A) We recommend that long-term investors should continue to systematically invest in the equities. There is a possibility that in the near-term equity returns could be muted, or we may see some volatility due to some major upcoming global events.
But, India still places favourably within the emerging market basket (among FIIs) and has one of the highest overweight positions (relative to benchmark index) in portfolios of global emerging market and Asia Ex-Japan equity funds.
Investors can also use any large market corrections/dips to make lump sum investments in the equities. Historical data (including the recent Covid related market correction in 2020) has shown that investments made in well-diversified portfolio in challenging times can be quite rewarding for investors over the medium to long term.
Q) What is the importantance of asset allocation and why is it more relevant when Gold and probably global investing might have delivered better returns than domestic equities?
A) The topic of asset allocation typically comes more into focus during periods of market volatility. But, the important thing is that investors should be disciplined and stick to their asset allocation (based on their risk profile and investment horizon).
The importance of asset allocation has been realised in past major market corrections (including the recent Covid market correction in 2020), as it helps in diversifying risk and may deliver better risk-adjusted returns--suited to the investor’s individual risk profile.
Q) How will markets react if Donald Trump wins the US elections? Would that be good for equity markets? What is street factoring in? Q) How will markets react if Joe Biden wins?
A) The US election opinion polls are pointing to a lead for Joe Biden, although his lead vs Trump has narrowed a bit in recent days. However, we have seen during the 2016 US elections that the opinion polls may not necessarily work out as predicted, so you have to discount them to some extent.
Markets may prefer a Trump victory (especially due to expectations of continuity in his administration’s tax reforms & fiscal expansion), and therefore, we may see some volatility in the short term. We will need to see if there is any change in policy initiatives under the new or existing US government, after the elections.
There is uncertainty on certain factors, and these will need to be monitored - like what will be the policy action, if trade pacts especially with China see any change (in terms of escalation/de-escalation), if there are changes to fiscal stimulus and other economic packages and tax reforms under the new / existing regime.
Q) The investment universe has shrunk dramatically post the COVID outbreak as many businesses have moved to a new normal. Do you think investors should focus on profitability (growth), and not so much concerned above large, mid or smallcap?
A) Investors have been rewarding/favouring those companies whose earnings growth has been stable amidst this pandemic or is showing healthy recovery.
Also, those companies which have a stronger balance sheet, are well-capitalized to deal with Covid-19 led economic slowdown and have been able to go in for digital adoption in their business effectively.
If the trajectory of economic recovery continues to gather pace then we may see some of the cyclical sectors starting to outperform. From a market-cap perspective, we prefer the large-cap segment and advise higher allocation to the same.
Macro fundamentals still remain a bit challenged and therefore large caps may see relatively less volatility compared to mid/small caps.
Q) Do you think the recent micro-data suggests that green shoots are visible and that is one of the prominent reasons for the confidence we are seeing on street?
A) Yes, we have seen a healthy recovery in various high-frequency economic indicators. Various economic/business activity indices are also indicating that economic activity is back to ~85-95% of pre-covid levels.
This has indeed been better than expectations and the macro recovery along with strong global liquidity and hopes a vaccine soon have helped in a healthy recovery in equity markets.
In its October monetary policy review, RBI forecasted India’s GDP to contract 9.5%YoY in FY21; although the central banks expect GDP growth to recover to positive territory in Q4 FY21 and register a strong growth of ~21%YoY in Q1 FY22 (primarily helped by the base effect).
Q) PM Modi urged the people of India to enjoy the festivities but with caution as COVID is not over yet. Do you also advocate similar advice to stock market investors?
A) We are seeing a second wave of Covid-19 cases in some of the major European countries (like France, UK, Spain, and Italy), although the mortality rate has been controlled and is relatively lower this time.
Some other nations (including the US) have also seen an escalation in Covid cases, and that may continue as the economy opens up, and we approach the winter season (where flu cases typically pick-up).
In India, we have seen new daily Covid cases seeing a healthy moderation (from the peak in September), and a recovery rate has been high (above 85% at the national level)—leading to a significant reduction in active cases, and the mortality rate has also been controlled at ~1.5% at the national level.
However, PM Modi’s message of maintaining caution during the festive season is warranted. If safety/caution is not maintained, with economy/activity opening up further & winter months approaching—there is a risk of a possible second wave in India too—which we should try to avoid.
However, hopes are also high of a Covid vaccine in the next few months, and that will help to lift market sentiments.
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